<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
| | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___________ TO ___________
COMMISSION FILE NUMBER 1-13271
800 TRAVEL SYSTEMS, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE 59-3343338
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4802 GUNN HIGHWAY TAMPA, FLORIDA 33624
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (813) 908-0404
N/A
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR
IF CHANGED SINCE LAST REPORT)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes |X| No | |
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 7,616,296 shares of Common Stock,
$.01 par value, were outstanding, as of April 30, 2000.
Transitional Small Business Disclosure Format (check one):
Yes | | No |X|
<PAGE>
<TABLE>
INDEX
<CAPTION>
Page
Number
------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance sheets - March 31, 2000 (unaudited) and
December 31, 1999 3
Condensed Statements of Operations -Three Months Ended
March 31, 2000 and March 31, 1999 (unaudited) 4
Condensed Statement of Stockholders' Equity- Three Months Ended
March 31, 2000 (unaudited) 5
Condensed Statements of Cash Flows- Three Months Ended
March 31, 2000 and March 31, 1999 (unaudited) 6
Notes to Condensed Financial Statements- March 31, 2000 (unaudited) 7-8
Item 2. Management's Discussion and Analysis or Plan of Operations 9-19
PART II. OTHER INFORMATION 20
SIGNATURES 21
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
CONDENSED BALANCE SHEETS
<CAPTION>
March 31, December 31,
2000 1999
------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 2,074,047 $ 2,181,020
Commissions receivable 1,403,363 1,217,144
Prepaid assets 122,917 166,986
------------- -------------
Total current assets 3,600,327 3,565,150
------------- -------------
LEASEHOLD IMPROVEMENTS AND EQUIPMENT, NET 1,873,736 1,799,050
------------- -------------
EXCESS OF COST OVER NET ASSETS ACQUIRED, NET 4,510,586 4,560,640
------------- -------------
OTHER ASSETS
Trademarks, net 316,382 323,299
Capitalized software 402,115 387,007
Other 58,029 77,025
------------- -------------
Total other assets 776,526 787,331
------------- -------------
TOTAL ASSETS $ 10,761,175 $ 10,712,171
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 143,188 $ 135,091
Accounts payable and accrued liabilities 1,120,407 958,048
Unearned revenue 92,796 100,529
------------- -------------
Total current liabilities 1,356,391 1,194,478
UNEARNED REVENUE 283,859 299,325
DEFERRED RENT 144,442 136,517
LONG-TERM DEBT - excluding current maturities 241,200 273,231
------------- -------------
Total liabilities 2,025,892 1,903,551
------------- -------------
STOCKHOLDERS' EQUITY
Common stock 76,163 76,163
Additional paid-in capital 12,137,150 12,137,150
Accumulated deficit (3,478,030) (3,404,693)
------------- -------------
Total stockholders' equity 8,735,283 8,808,620
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,761,175 $ 10,712,171
============= =============
</TABLE>
The accompanying notes are an integral part of these condensed statements.
3
<PAGE>
<TABLE>
CONDENSED STATEMENTS OF OPERATIONS
<CAPTION>
Three Months Ended
March 31,
--------------------------------
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
REVENUES
Commissions $ 1,574,878 $ 1,832,512
Ticket delivery and service fees 1,501,903 1,047,946
------------ ------------
Total revenues 3,076,781 2,880,458
OPERATING EXPENSES
Employee costs 1,617,634 1,457,734
Other selling, general and administrative expenses 1,554,819 1,553,572
------------ ------------
Total operating expenses 3,172,453 3,011,306
------------ ------------
LOSS FROM OPERATIONS (95,672) (130,848)
INTEREST INCOME, NET 22,335 23,539
------------ ------------
LOSS BEFORE INCOME TAXES (73,337) (107,309)
------------ ------------
Provision for income taxes -- --
------------ ------------
NET LOSS $ (73,337) $ (107,309)
============ ============
NET LOSS PER COMMON SHARE-BASIC $ (.01) $ (.01)
============ ============
-DILUTED $ (.01) $ (.01)
============ ============
AVERAGE OUTSTANDING
COMMON SHARES-BASIC 7,616,296 7,614,658
============ ============
-DILUTED 7,616,296 7,614,658
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed statements.
4
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<TABLE>
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
<CAPTION>
Common Stock Additional Stock
----------------------------- Paid-in Subscriptions Accumulated
Shares Amount Capital Receivable Deficit Total
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 5,959,709 $ 59,597 $ 5,297,424 $ (21,547) $ (3,765,514) $ 1,569,960
Sales of common stock and
warrants net of issuance expenses
of $2,252,602 1,350,000 13,500 4,872,024 -- -- 4,885,524
Joseph Stevens Group, Inc.
Acquisition 383,333 3,833 1,944,082 -- -- 1,947,915
Purchase and retirement of shares (204,615) (2,046) (405,954) -- -- (408,000)
Exercise of warrants 58,200 582 363,168 -- -- 363,750
Exercise of stock options 100,000 1,000 99,000 -- -- 100,000
Issuance of options for services -- -- 144,750 -- -- 144,750
Shares exchanged in payment of
Receivables (49,531) (495) (247,152) -- -- (247,647)
Payment of stock subscription -- -- -- 21,547 -- 21,547
Net earnings -- -- -- -- 301,866 301,866
------------- ------------- ------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 1998 7,597,096 75,971 12,067,342 -- (3,463,648) 8,679,665
Exercise of warrants 2,000 20 12,480 -- -- 12,500
Exercise of stock options 17,200 172 57,328 -- -- 57,500
Net earnings -- -- -- -- 58,955 58,955
------------- ------------- ------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 1999 7,616,296 76,163 12,137,150 -- (3,404,693) 8,808,620
Net loss (unaudited) -- -- -- -- (73,337) (73,337)
------------- ------------- ------------- ------------- ------------- -------------
BALANCE, MARCH 31, 2000
(unaudited) 7,616,296 $ 76,163 $ 12,137,150 $ -- $ (3,478,030) $ 8,735,283
============= ============= ============= ============= ============= =============
The accompanying notes are an integral part of these condensed statements.
</TABLE>
5
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<TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<CAPTION>
Three Months Ended
March 31,
-------------------------------
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Increase (decrease) in cash
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (73,337) $ (107,309)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 186,499 100,810
Receivables (186,218) (371,019)
Prepaid assets and other assets 63,065 27,804
Deferred rent and unearned revenue (15,274) 4,920
Accounts payable and accrued liabilities 162,359 102,857
------------ ------------
Net cash provided by (used in) operating activities 137,094 (241,937)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of leasehold improvements and equipment (204,215) (66,514)
Software development costs (15,108) (126,539)
------------ ------------
Net cash used in investing activities (219,323) (193,053)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt (24,744) (33,327)
Proceeds from exercise of options and warrants -- 70,000
------------ ------------
Net cash (used in) provided by financing activities (24,744) 36,673
------------ ------------
NET DECREASE IN CASH (106,973) (398,317)
CASH, AT THE BEGINNING OF PERIOD 2,181,020 2,387,273
------------ ------------
CASH, AT THE END OF THE PERIOD $ 2,074,047 $ 1,988,956
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 6,363 $ 482
============ ============
The accompanying notes are an integral part of these condensed statements.
</TABLE>
6
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 2000 (unaudited)
NOTE A: BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Rule 10-01 of
Regulation S-X. They do not include all information and notes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three month period ended March 31, 2000 are not
necessarily indicative of results that may be expected for the year ending
December 31, 2000 or any future period. The condensed financial statements
should be read in conjunction with the financial statements and the notes
thereto, together with management's discussion and analysis or plan of
operations, included in the annual report on Form 10-KSB for the year ended
December 31, 1999.
NOTE B: NET LOSS PER COMMON SHARE
The following table reconciles the numerators and denominators of the basic and
diluted net loss per share computations, as computed in accordance with FAS 128:
Three Months Ended
March 31,
---------------------------
2000 1999
------------ ------------
Net loss - (numerator) $ (73,337) $ (107,309)
Basic:
Average common shares outstanding
(denominator) 7,616,296 7,451,035
============ ============
Net loss per
Common share - basic (.01) (.01)
============ ============
Diluted:
Average common shares outstanding 7,616,296 7,614,658
Effect of dilutive options and warrants -- --
------------ ------------
Adjusted average common shares
(denominator) 7,616,296 7,614,658
============ ============
Net loss per
common share-diluted (.01) (.01)
============ ============
All options and warrants outstanding for the three months ended March 31, 2000
and 1999 are excluded from the calculation of diluted weighted average shares as
they are anti-dilutive.
NOTE C: COMMITMENTS AND CONTINGENCIES
Agreements with Reservation System Provider
- -------------------------------------------
In May 1999, 800 Travel Systems entered into a five-year agreement with its
reservation system provider. Pursuant to this agreement, the reservation system
provider agreed to pay 800 Travel Systems an incentive that is recorded as
unearned revenue. This incentive will be recognized as revenue ratably over the
life of the agreement. If 800 Travel Systems should terminate or be deemed in
default upon the terms of this agreement, 800 Travel Systems agrees to repay
this incentive in full.
7
<PAGE>
NOTE C: COMMITMENTS AND CONTINGENCIES - Continued
As part of this agreement, the Company is accruing revenue based upon the number
of bookings made with the reservation system provider. This revenue may be
reduced if a minimum number of annual bookings are not obtained. The Company
believes they will reach the annual minimum number of bookings needed to realize
the full amount of this revenue.
Agreements with Related Parties
- -------------------------------
In April 1999, 800 Travel Systems entered into a $60,000 loan agreement and a
$100,000 deferred compensation agreement with Mr. Mark Mastrini, President and
CEO of 800 Travel Systems. The loan amount will be forgiven in two $30,000
installments if Mr. Mastrini is employed by 800 Travel Systems as of January 1,
2000 and 2001. The total deferred compensation will be paid if Mr. Mastrini is
employed by 800 Travel Systems as of April 1, 2009.
Phone Agreements
- ----------------
In August 1999, the Company entered into a new agreement with its telephone
provider which provided an agreed upon rate for its services. This rate is based
upon the Company reaching an annual minimum charge for its long-distance
services. The Company anticipates reaching this annual minimum charge.
Legal Proceedings
- -----------------
The Company is the defendant in an action currently pending in the 134th
District Court of Dallas County, Texas entitled "First London Securities
Corporation v. 800 Travel Systems, Inc. A/k/a/ I FLY", Case No. 00-02222. The
Company was served with this action in April, 2000; the action was brought by
First London Securities, the Company's managing underwriter for its IPO in
January 1998. The plaintiff asserts in this action that the Company failed to
keep current all filings necessary to enable the plaintiff to exercise its
rights under its Underwriting and Representatives' Warrant Agreements at an
optimal market price. Plaintiff currently alleges damages up to approximately
$1.7 million, in addition to court costs and attorney's fees. While it is
impossible to predict the eventual outcome of this action, the Company believes
that it has defenses to these claims and intends to defend this suit vigorously.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Condensed Financial Statements and Notes thereto included elsewhere in this Form
10-QSB. This discussion contains certain forward-looking statements that involve
risks and uncertainties. The Company's actual results and the timing of certain
events could differ materially from those discussed in these forward-looking
statements as a result of certain factors, including, but not limited to, those
set forth herein and elsewhere in this Form 10-QSB.
OVERVIEW
800 Travel Systems, Inc. referred to herein as "800 Travel Systems", "800
Travel", "the Company", "we", "our", "us" is a leading direct marketer of travel
related services, focused primarily on providing air transportation reservation
services. The Company provides low-priced airline tickets for domestic and
international leisure travel to its customers through its easy-to-remember,
toll-free numbers and through its website on the World Wide Web (at
www.LowAirFare.com). The Company operates two reservation centers, one in Tampa,
Florida and the other in San Diego, California 7 days a week throughout the
year. As a result of its agreements to sell discounted tickets with airlines
directly, as well as other ticket suppliers, 800 Travel Systems is able to
charge its customers a service charge, while still offering low-priced tickets.
Since 800 Travel Systems is currently a broker for tickets it does not purchase
or inventory tickets and accordingly, has no costs and/or risks associated with
such inventory.
The Company generates revenues principally from (i) commissions on air travel
tickets including override commissions on air travel tickets the Company books
on certain airlines, (ii) segment incentives under its contract with SABRE, and
(iii) service fees that it charges its customers. The Company markets its
services primarily by advertising in Yellow Pages throughout the continental
United States with populations whose general travel profiles are attractive to
the Company.
In January 1999, 800 Travel Systems broadened its ticket distribution by
offering online booking at "www.LowAirfare.com." Internet bookings accounted for
approximately 14% and 1% of total gross reservations for the three months ended
March 31, 2000 and 1999, respectively. 800 Travel Systems expects online gross
reservations and online net revenues to represent an increasing percentage of
gross reservations and net revenues in future periods. To differentiate itself
from the competition, the Company's website was designed to have human
interaction capabilities. The desired result from the Company's Internet
initiative is to increase completed Internet sales in a cost effective manner by
providing business to business (B2B) and business to consumer (B2C) customers a
website that offers the choice of making reservations conveniently, without an
agent or if needed, with an agent. The Company jointly announced the completion
of certain enhancements to its website in April 2000 by integrating technology
developed with Sabre Holdings Corporation and e-Business Interactive Solutions,
Inc. This new technology provides the online travel customers the flexibility to
book air travel online by themselves or with the assistance of an online travel
agent. With this integrated technology, the Company is experiencing an
approximate 18% completed sales ratio (look-to-book ratio) which compares
favorably to the e-commerce industry average of approximately 2%. In addition,
this technology enables the Company's reservation agents to handle up to eight
customers at once as each online customer progresses through the online booking
process.
800 Travel Systems' believes its growth strategy will leverage Internet
technologies with its core competencies of low cost, call center operations and
travel industry expertise to both B2B and B2C markets. The growth strategy
includes selling higher volumes of cruise tickets, hotel reservations and auto
rentals as well as providing travel operation functions such as, order
administration, ticketing, shipping, quality control and customer service to
online travel service providers who typically outsource these functions. This
growth strategy should lessen the current dependency on air travel reservations
and should help offset the anticipated continued pressure on margins from
airline commission reductions and other competitive forces. 800 Travel Systems
expects revenues from sources other than airline ticket sales to increase in
future periods. Net earnings for the three months ended March 31, 2000 were
negatively impacted by approximately $64,000 resulting from the Internet
initiative and by an additional $182,000 resulting from the additional
compensation and costs for new executives and consultants associated with the
implementation of the Company's growth strategy. The Company also anticipates
its operating and marketing expenses to increase as its strategy is implemented.
9
<PAGE>
Gross reservations represent the aggregate retail value of the tickets sold to
consumers, including delivery and service fees charged by the Company and taxes
and impact fees levied on the behalf of various authorities. For comparative
purposes, it is important to recognize that certain other travel companies
report their gross reservations as revenues. Gross reservations are not required
by generally accepted accounting principles (GAAP) and should not be considered
in isolation or as a substitute for other information prepared in accordance
with GAAP. Gross reservations for the three months ended March 31, 2000 and 1999
were $21,066,066 and $18,722,300 respectively. Substantially all of the gross
reservations are generated from airline ticket sales. As anticipated by the
management of 800 Travel Systems, airline commissions were further reduced in
October 1999 and will negatively impact future revenues to the extent that such
reduced commissions are not able to be offset by increases in service fees
charged to customers. The Company anticipates being able to offset future
commission reductions by negotiating non-published fares directly with the
airline carriers to which a mark up from the consumer would be earned by the
Company.
800 Travel Systems' operating expenses include primarily those items necessary
to advertise its services, maintain and staff its travel reservation centers
including technological enhancements, payroll, commissions and benefits,
telephone, ticket delivery, general and administrative expenses including rent
and computer maintenance fees; and interest, fees and expenses associated with
800 Travel Systems' financing activities. The Company expects to continue to
incur additional operating and selling expenses relating to its Internet
initiative.
Set forth below for the periods indicated are the revenues as a percentage of
gross reservations and operating expenses, other income and net loss as a
percentage of revenues for the three months ended March 31, 2000 and 1999,
respectively.
Three Months Ended
March 31,
---------------------------
2000 1999
------------ ------------
Revenues
Commissions 7.5% * 9.8% *
Ticket delivery and service fees 7.1% 5.6%
------------ ------------
Total Revenue 14.6% 15.4%
============ ============
Operating Expenses
Employee costs 52.6% ** 50.6% **
SG & A, Other 50.5% 53.9%
------------ ------------
Total Operating Expenses 103.1% 104.5%
============ ============
Other Income 0.7% 0.8%
============ ============
Net Loss -2.4% -3.7%
============ ============
* Revenues as a percentage of gross reservations.
** Expenses as a percentage of revenues.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
REVENUES. Revenues increased $.2 million, or 6.8%, to $3.1 million for the three
months ended March 31, 2000. This increase resulted primarily from an increase
in the volume of tickets sold. The average revenue per ticket remained
relatively constant as increased service fees charged to customers and
commissions related to the new contract with 800 Travel Systems' reservation
system provider were offset by a reduction in commissions paid by airlines.
Revenues as a percentage of gross reservations decreased to 14.6% for the three
months ended March 31, 2000 from 15.4% for the three months ended March 31,
1999. This decrease was primarily due to the increased percentage of Internet
bookings, since the Company charges no service fees on such bookings however,
the Company currently earns commissions and segment incentives from these
bookings. Gross reservations booked for the three months ended March 31, 2000
increased $2.3 million or 12.5% to $21.1 million. This increase resulted
primarily from an increase in the volume of tickets sold and from a higher
average reservation price per ticket.
10
<PAGE>
Revenues through call centers decreased $.1 million or 2.1% to $2.8 million.
This decrease resulted primarily from a reduction in telephone calls received
and was partially offset by an increased percentage of calls answered resulting
from certain operational improvements. The decrease in telephone calls received
was primarily due to increased competitive pressures from Internet based, online
travel agencies. To increase revenues through its call centers, 800 Travel
Systems intends to improve certain core competencies such as negotiated
discounted ticket pricing with airlines, hiring additional reservation agents,
increasing reservation agent hours worked through schedule adjustments,
increasing travel-related products to sell and increasing and/or reallocating
advertising dollars to new advertising programs.
Revenues from Internet bookings which include commissions and segment
incentives, were $.3 million (or 9.2%) of total revenues for the three months
ended March 31, 2000. For the three months ended March 31, 1999, revenues from
Internet bookings were immaterial. 800 Travel Systems expects Internet gross
reservations and revenues to represent an increasing portion of gross
reservations and revenues in future periods.
OPERATING EXPENSES. Operating expenses increased $.2 million, or 5.3%, to $3.2
million for the three months ended March 31, 2000. Operating expenses as a
percentage of revenues decreased 1.4% to 103.1%. Employee costs increased $.2
million to $1.6 million (or 52.6% of revenues) for the three months ended March
31, 2000 from $1.4 million (or 50.6% of revenues) for the three months ended
March 31, 1999. This increase resulted primarily from increased Internet
reservation agent, quality control and corporate wages and was partially offset
by a decrease in call center reservation agent wages. Employee costs as a
percentage of revenues increased primarily from new corporate personnel hired to
implement the Company's growth strategy and the addition of a quality control
department. Other selling, general and administrative ("SG&A") expenses were
approximately equal for the three months ended March 31, 2000 and 1999. SG&A
expenses including increases in advertising, legal and consulting expenses were
offset by decreases in telephone expenses. This decrease resulted primarily from
a telecommunications contract that became effective in August 1999. SG&A
expenses as a percentage of revenues decreased 3.4% to 50.5% for the three
months ended March 31, 2000.
INCOME TAXES. No provision for income taxes has been recorded since 800 Travel
Systems recorded a loss before income taxes for the three months ended March 31,
2000.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $.1 million for the three months
ended March 31, 2000 primarily as a result of depreciation and amortization
expenses and increases in accounts payable and accrued liabilities and was
partially offset by a net loss and an increase in receivables. For the three
months ended March 31, 1999, net cash used in operating activities was $.2
million primarily as a result of a net loss and an increase in accounts
receivable and was partially offset by depreciation and amortization expenses
and an increase in accounts payable and accrued liabilities.
Net cash used in investing activities was $.2 million for the three months ended
March 31, 2000 primarily as a result of the purchase of computer hardware. For
the three months ended March 31, 1999, net cash used in investing activities was
$.2 million primarily as a result of software development costs.
Net cash used by financing activities was $24,744 for the three months ended
March 31, 2000 primarily as a result of principal payment on debt. For the three
months ended March 31, 1999 net cash provided by financing activities was
$36,673 primarily as a result of net proceeds received from the exercise of
stock options and warrants and was partially offset by the principal payment on
debt.
Management believes that the existing cash and cash expected to be provided by
operating activities will be sufficient to fund both the short and long term
capital and liquidity needs of 800 Travel Systems' operations for the
foreseeable future. 800 Travel Systems has budgeted approximately $3.5 million
11
<PAGE>
for capital expenditures, nearly all of which is intended for the Internet
initiative and necessary computer hardware relating to the new contract with the
reservation system provider effective May 1999. Approximately $1.4 million has
been expended through March 31, 2000 with the remainder to be expended within
the next 12 months. If cash on hand or cash expected to be provided by operating
activities is not sufficient to satisfy 800 Travel Systems' liquidity and
capital requirements, 800 Travel Systems may seek to sell additional equity or
debt securities or obtain credit lines from financial institutions. The sale of
equity securities or convertible debt could result in additional dilution to 800
Travel Systems' shareholders. There is no assurance that financing will be
available in amounts or on terms acceptable to 800 Travel Systems, if at all.
YEAR 2000 READINESS
As of the date of this report 10-QSB, which is subsequent to the year beginning
2000, 800 Travel Systems has experienced no material adverse affects from the
onset of Year 2000. 800 Travel Systems will continue to monitor for potential
negative affects from the Year 2000 however, no material adverse affects are
anticipated. 800 Travel Systems' total costs of its year 2000 preparedness were
not material, however, there can be no assurances that the costs resulting from
year 2000 issues will not have a material impact on 800 Travel Systems'
business, operations or financial condition in future periods.
SEASONALITY
Based upon the results of its operations during 1999 and 2000 to date and its
knowledge of the travel industry, 800 Travel Systems anticipates its business
may be affected by seasonality. Travel bookings typically are low in the months
January through March, increase in April through October as consumers plan their
vacations and typically decline in November through December. In response, 800
Travel Systems will vary the number of agents on staff at any time. There can be
no assurance that 800 Travel Systems may not have to take proactive steps to
reduce its work force in response to seasonal fluctuations in the future.
Notwithstanding 800 Travel Systems' efforts, the seasonality of the travel
industry is likely to adversely impact 800 Travel Systems' business. Moreover,
as a consequence of such seasonality and other factors, 800 Travel Systems'
quarterly revenue and operating results will be difficult to forecast and period
to period comparisons of results may not be relevant or informative.
FORWARD LOOKING STATEMENTS -- RISK FACTORS
Investors should carefully consider the following risk factors, in
addition to the other information concerning the factors affecting forward
looking statements. Each of these risk factors could adversely affect our
business, operating results and financial condition as well as adversely affect
the value of an investment in 800 Travel Systems. You should be able to bear a
complete loss of your investment.
Certain oral statements made by management from time to time and
certain statements contained herein and in documents incorporated herein by
reference that are not historical facts are "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 and, because such statements involve risks and
uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements. The terms "800 Travel Systems,"
"company," "we," "our," and "us" refer to 800 Travel Systems, Inc. The words
"expect", "believe", "goal", "plan", "intend", "anticipate", "estimate", "will"
and similar expressions and variations thereof if used, are intended to
specifically identify forward-looking statements. Forward-looking statements are
statements regarding the intent, belief or current expectations, estimates or
projections of 800 Travel Systems, our Directors or our Officers about 800
Travel Systems and the industry in which we operate, and assumptions made by
management, and include among other items, (i) our strategies regarding growth,
including our intention to further develop and improve our Internet capabilities
and diversify revenues utilizing our call center operation and travel industry
expertise; (ii) our financing plans; (iii) trends affecting our financial
condition or results of operations; (iv) our ability to continue to control
costs and to meet our liquidity and other financing needs; (v) the future impact
from Year 2000 readiness plans and costs; and (vi) our ability to respond to
changes in customer demand, including as a result of increased competition and
the increase of Internet activity. Although we believe our expectations are
based on reasonable assumptions, we can give no assurance that the anticipated
results will occur. We disclaim any intention or obligation to update or revise
forward-looking statements, whether as a result of new information, future
events or otherwise.
12
<PAGE>
Investors and prospective investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those in the forward-looking statements as a result of various factors which
include, among others, (i) general economic conditions, particularly those
affecting fuel and other travel costs and their effect on the volume of consumer
air travel; (ii) conditions in the capital markets, including the interest rate
environment and the availability of capital, which could affect our internal
growth and possibilities for strategic alliances in the travel and telemarketing
areas; (iii) changes in the competitive marketplace that could affect our
revenue and/or cost bases, such as increased competition from traditional and
Internet based travel agencies, consolidators and the airlines themselves,
changes in the commissions paid by airlines, and increased labor, marketing,
computer software/hardware and telecommunications costs; (iv) the availability
and capabilities of the SABRE electronic travel reservation system and ancillary
software; (v) the success of our Internet initiatives; (vi) changes in
commission rates; (vii) the improved productivity of our reservation agents as
they gain experience and utilize technological improvements; (viii) the future
impact of our Year 2000 readiness and the Year 2000 readiness of third parties
with which we have material relationships, particularly SABRE; (ix) our rights
to the use of software and other intellectual property and the potential for
others to challenge and otherwise adversely affect such rights; and (x) other
factors including those identified in our filings with the SEC including but not
limited to information under the heading "Risk Factors" in the Form SB-2
Registration Statement and Prospectus for our initial public offering as amended
from time to time, and the following risk factors.
WE HAVE A LIMITED OPERATING HISTORY AND A HISTORY OF LOSSES. OUR FUTURE
OPERATING RESULTS MAY NOT BE PROFITABLE.
We have been operating for less than four years and during that time we
have generated a significant accumulated operating loss. There can be no
assurance that we will be able to operate profitably, particularly if we seek to
expand through acquisitions or the addition of new Internet services. We only
recently expect to initiate our online operations and, accordingly, our
prospects in this field must be considered in light of the difficulties
encountered in any new business. These risks include our failure to:
o attract additional travel suppliers and consumers to our service
o maintain and enhance our brand
o expand our service offerings
o operate, expand and develop our operations and systems efficiently
o maintain adequate control of our expenses
o raise additional capital
o attract and retain qualified personnel
o respond to technological changes
o respond to competitive market conditions
WE ARE DEPENDENT ON THE SABRE SYSTEM.
Our ability to quote air travel ticket prices, make reservations and
sell tickets is dependent upon our contractual right to use, and the performance
of, the SABRE electronic travel reservation system. In May 1999, we entered into
a five year agreement with SABRE, Inc. to lease the SABRE system in our Tampa
and San Diego reservation centers. If the SABRE system were to cease
functioning, or if we were to lose our contractual right to use the SABRE system
through our inability to renew the agreement, upon expiration thereof or through
a default by us or other termination event under the agreement during the term
thereof, we would not be able to conduct operations until a replacement system
was installed and became operational. Only a very limited number of companies
provide reservation systems to the travel agency industry. There can be no
assurance that a replacement system could be obtained on comparable terms or if
obtained, installed in time to successfully continue operations.
During any interruption in the operation of SABRE, we would lose
revenues. Other travel agencies using other travel reservation systems would not
be subject to such interruption of their operations, and we may lose market
share to such competitors. Upon the interruption of the operation of the SABRE
system, we could decide to commence operations with another travel reservation
system. Substantial expenses could be required for acquiring the right to use a
new system and retraining reservation agents. In addition, any impairment of the
SABRE system which does not cause us to cease operations could, nevertheless,
adversely affect the quality of our services, resulting in lost revenues or
market share and could require us to subscribe to a different travel reservation
system.
13
<PAGE>
WE ARE SUBJECT TO ADJUSTMENTS IN AIRLINE COMMISSIONS WHICH COULD REDUCE OUR
REVENUES.
In October 1999, the major airlines announced reductions in the
commissions they will pay travel agents from approximately 8% to 5% and subject
to a cap of $50.00 for domestic round trip ticket sales. In addition, at least
one airline has implemented a fixed-rate commission of $10.00 for domestic
online round trip ticket sales. We anticipate continued downward pressure on
airline commission rates. Such reductions and future reductions, if any, could
have a material adverse effect on our operations. We may not be paid commission
by airlines for stand alone bookings on our web site or online agent asserted
bookings on our web site. We also may not be able to impose service charges for
our Internet services, which could adversely affect our services and earnings
RISKS RELATING TO THE AIRLINE INDUSTRY
Developments in the airline industry may result in a decrease in the
price or number of tickets we sell. Concerns about passenger safety may result
in a decrease in passenger air travel and a consequent decrease in the number of
tickets we sell. There can be no assurance that any such developments will not
occur or that we will not be adversely affected by any such decrease in the
level of passenger air travel.
IF TRAVEL RELATED INTERNET SERVICES OR THE DIVERSIFIED USE OF OUR CALL CENTER
OPERATIONS DO NOT ACHIEVE WIDESPREAD MARKET ACCEPTANCE, OUR BUSINESS MAY NOT
GROW.
Our success will depend in large part on widespread market acceptance
of the Internet as a vehicle for the buying of airline tickets and other travel
related products and services as well as the diversified use of our call center
operations. Consumers who have historically purchased airline tickets and other
travel related products and services using traditional commercial channels, such
as local travel agents and calling airlines directly, must instead purchase
these products through our website or through call center operations. Consumers
frequently use our website or call centers for route pricing and other travel
information and then choose to purchase airline tickets or make other
reservations directly from travel suppliers or other travel agencies. If the
online market develops more slowly than expected, or if our services do not
achieve widespread market acceptance, our business will grow more slowly than
expected. Our future growth, if any, will depend on critical factors including
but not limited to: (i) the growth of the Internet as a tool used in the process
of buying airline tickets and other travel related products and services; (ii)
our ability to successfully and cost effectively market our services to a
sufficiently large number of people; and (iii) our ability to consistently
deliver high quality and fast and convenient service at competitive prices.
Our revenues will not grow as much as we anticipate if the market for
our services does not continue to develop, our services do not continue to be
adopted or consumers fail to significantly increase their use of the Internet as
a tool in the process of buying airline tickets and other travel related
products and services.
WE MAY BE UNABLE TO DEVELOP NEW RELATIONSHIPS WITH STRATEGIC PARTNERS AND
MAINTAIN OUR EXISTING RELATIONSHIPS.
Our business depends on establishing and maintaining relationships with
airlines, SABRE and others. As a result of our agreements to sell discounted
tickets with airlines directly, as well as other ticket suppliers, we are able
to charge our customers a service charge, while still offering low priced
tickets. We cannot assure you that we will be able to establish new
relationships or maintain existing relationships. If we fail to establish or
maintain these relationships, it could adversely affect our business.
WE OPERATE IN A HIGHLY COMPETITIVE MARKET WITH LOW BARRIERS TO ENTRY WHICH COULD
HARM OUR BUSINESS.
While the market for buying airline tickets and other travel related
products and services on the Internet is relatively new and rapidly evolving, it
is already competitive and characterized by entrants that may develop services
similar to ours. Many of our existing competitors, as well as our potential
competitors, have longer operating histories on the Web, greater name
recognition, higher amounts of user traffic and significantly greater financial,
technical and marketing resources than we do. In addition, there are relatively
low barriers to entry to our business. We do not have patents or other
intellectual property that would preclude or inhibit competitors from entering
the market. Moreover, due to the low cost of entering the market, competition
may intensify and increase in the future. We compete against other online travel
14
<PAGE>
web sites. We also compete with traditional methods used by travel agents to
market airline tickets, including yellow pages, classified ads, travel brochures
and other media advertising. This competition may limit our ability to become
profitable or result in the loss of market share.
Many of our current and potential competitors have longer operating
histories, larger customer bases, greater brand recognition and significantly
greater financial, marketing and other resources than us and may enter into
strategic or commercial relationships with larger, more established and well
financed companies. Certain of our competitors may be able to secure services
and products from travel suppliers on more favorable terms, devote greater
resources to marketing and promotional campaigns and devote substantially more
resources to website and systems development than us. In addition, new
technologies and the expansion of existing technologies may increase competitive
pressures on us. In particular, Microsoft Corporation has publicly announced its
intent to continue to invest heavily in the area of travel technology and
services. Increased competition may result in reduced operating margins, loss of
market share and brand recognition. There can be no assurance that we will be
able to compete successfully against current and future competitors, and
competitive pressures faced by us may have a material adverse effect on our
business, operating results and financial condition.
Our sales affiliates and employees are not subject to noncompetition
agreements. In addition, our business model does not involve the use of a large
amount of proprietary information. As a result, we are subject to the risk that
our sales affiliates or employees may leave us and may start competing
businesses. The emergence of these enterprises will further increase the level
of competition in our market and could harm our growth and financial
performance.
WE MAY NOT BE ABLE TO MAINTAIN OUR WEB DOMAIN NAME, WHICH MAY CAUSE CONFUSION
AMONG WEB USERS AND DECREASE THE VALUE OF OUR BRAND NAME.
We currently hold a Web domain name relating to our brand. Currently,
the acquisition and maintenance of domain names is regulated by governmental
agencies and their designees. The regulation of domain names in the U.S. and in
foreign countries is expected to change in the near future. As a result, we may
not be able to maintain our domain name. These changes could include the
introduction of additional top level domains, which could cause confusion among
Web users trying to locate our sites. Furthermore, the relationship between
regulations governing domain names and laws protecting trademarks and similar
proprietary rights is unclear. We may be unable to prevent third parties from
acquiring domain names that are similar to ours. The acquisition of similar
domain names by third parties could cause confusion among Web users attempting
to locate our site and could decrease the value of our brand name.
WE MAY NOT BE ABLE TO RECRUIT AND RETAIN THE PERSONNEL WE NEED TO SUCCEED.
We may be unable to retain our key employees and consultants and key
sales agents or attract, assimilate or retain other highly qualified employees
and sales agents in the future. Our future success depends on our ability to
attract, retain and motivate highly skilled employees and sales agents. If we do
not succeed in attracting new personnel or retaining and motivating our current
personnel, it may be difficult for us to manage our business and meet our
objectives.
A FAILURE IN THE PERFORMANCE OF OUR WEB HOSTING FACILITY SYSTEMS COULD HARM OUR
BUSINESS AND REPUTATION.
We depend upon a third party Internet service provider to host and
maintain our web site. Any system failure, including network, software or
hardware failure, that causes an interruption in the delivery of our web site or
a decrease in responsiveness of our web site service could result in reduced
revenue, and could be harmful to our reputation and brand. Our Internet service
provider does not guarantee that our Internet access will be uninterrupted,
error free or secure. Any disruption in the Internet service provided by such
provider could significantly harm our business. In the future, we may experience
interruptions from time to time. Our insurance may not adequately compensate us
for any losses that may occur due to any failures in our system or interruptions
in our service. Our Web servers must be able to accommodate a high volume of
traffic and we may in the future experience slower response times for a variety
of reasons. If we are unable to add additional software and hardware to
accommodate increased demand, this could cause unanticipated system disruptions
and result in slower response times. The costs associated with accommodating
such increased demand may exceed the revenues the increased demand may generate.
Ticket buyers may become dissatisfied by any system failure that interrupts our
ability to provide access or results in slower response time.
15
<PAGE>
Any reduction in performance, disruption in the Internet access or
discontinuation of services provided by our Internet service provider, GTE and
AT&T, or other telecommunications provider, or any disruption in our ability to
access the SABRE systems, could have a material adverse effect on our business,
operating results and financial condition. There can be no assurance that our
transaction processing systems and network infrastructure will be able to
accommodate increases in traffic in the future, or that we will, in general, be
able to accurately project the rate or timing of such increases or upgrade our
systems and infrastructure to accommodate future traffic levels on our online
sites. In addition, there can be no assurance that we will be able in a timely
manner to effectively upgrade and expand our transaction processing systems or
to successfully integrate any newly developed or purchased modules with our
existing systems. There can be no assurance that we will successfully utilize
new technologies or adapt our online sites, proprietary technology and
transaction processing systems to customer requirements or emerging industry
standards.
Our call center computer and communications hardware is provided under
a leasing arrangement and is located at the respective centers in Tampa, Florida
and San Diego, California. If either call center experiences a disaster that
interrupts service, inbound telephone calls can be re-routed to the other
center. Substantially all of our Internet computer and communications hardware
is provided by Exodus and is located at Exodus' New York Internet data center.
Our systems and operations are vulnerable to damage or interruption from fire,
flood, power loss, telecommunications failure, break-ins, earthquake and similar
events. We currently do not have redundant systems or a formal disaster recovery
plan and may not carry sufficient business interruption insurance to compensate
us for losses that may occur. Despite the implementation of network security
measures by us, our servers are vulnerable to computer viruses, physical or
electrical break-ins and similar disruptions, which could lead to interruptions,
delays, loss of data or the inability to accept and confirm customer
reservations.
OUR INTERNET SOFTWARE DEVELOPMENT EFFORTS MAY NOT SUCCEED.
We are in the process of working to enhance and expand our business and
opportunities through the use of the Internet and we are exposed to various
risks and uncertainties related to our arrangements or agreements with third
parties for the co-development or development of software systems for use in
conjunction with our Internet initiatives. Such risks and uncertainties include
but are not limited to the following: (i) we may expend significant funds for
co-development or development of software that exceed the benefits, if any,
ultimately derived from such software; (ii) any software co-developed by us or
developed for us may be functionally or technologically obsolete by the time
co-development or development is completed; (iii) the timetables necessary to
attain the advantages anticipated from such co-development or development may
not be achieved; (iv) others may develop similar software and make such software
available to our competitors or our competitors may develop similar software or
the software developed by others may have features and benefits beyond the
capabilities of the software co-developed, licensed or otherwise utilized by us;
(v) our rights with respect to any co-development or development arrangement may
become the subject of disputes and may result in our not having any rights in or
to such software and result in claims of violations of intellectual property
rights which could result in significant defense cost and the possibility of
damages being assessed against us; and (vii) key individuals involved in
connection with any software co-development arrangement with us could become
unable to complete or continue the co-development, which could cause the
co-development to end, or result in significant delays and increases in costs to
continue such co-development.
WE MAY BE LIABLE FOR INFRINGING THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.
We may receive in the future, notice of claims of infringement of other
parties' proprietary rights. Infringement or other claims could be asserted or
prosecuted against us in the future and it is possible that past or future
assertions or prosecutions could harm our business. Any such claims, with or
without merit, could be time consuming, resulting in costly litigation and
diversion of technical and management personnel, cause delays in the development
and release of new products or services, or require us to develop non-infringing
technology or enter into royalty or licensing arrangements. Such royalty or
licensing arrangements, if required, may not be available on terms acceptable to
us, or at all. For these reasons, infringement claims could harm our business.
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<PAGE>
OUR FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY COULD ADVERSELY AFFECT OUR
BRAND AND OUR BUSINESS.
We rely on a combination of trademark and copyright law and trademark
protection. Despite our efforts, we cannot be sure that we will be able to
prevent misappropriation of our intellectual property. It is possible that
litigation may be necessary in the future to enforce our intellectual property
rights, to protect our trade secrets or to determine the validity and scope of
the proprietary rights of others. Litigation could result in substantial costs
and diversion of our resources away from the operation of our business.
DECLINES OR DISRUPTIONS IN THE TRAVEL INDUSTRY GENERALLY COULD REDUCE OUR
REVENUES.
We rely on the health and growth of the travel industry. Travel is
highly sensitive to business and personal discretionary spending levels, and
thus tends to decline during general economic downturns. In addition, other
adverse trends or events that tend to reduce travel are likely to reduce our
revenues. These may include:
o price escalation in the airline industry or other travel-related
industries
o increased occurrence of travel-related accidents
o airline or other travel-related strikes
o political instability
o regional hostilities and terrorism
o bad weather
RISKS RELATED TO THE INTERNET INDUSTRY
OUR BUSINESS WILL SUFFER IF WE FAIL TO ADAPT TO EVOLVING STANDARDS AND
TECHNOLOGIES.
The standards and technologies that make up the Internet will evolve
and change over time. We must adapt our services to maintain compatibility in
the future to assure that we can continue to deliver high quality services on
the Web. We may expend significant amounts of our capital to maintain and adapt
our Web services without achieving any benefit in return. Our inability to
deliver high quality services would lead to a decline in the demand for our
services.
THIRD PARTY BREACHES OF DATABASE SECURITY COULD DISRUPT OUR OPERATIONS AND
INCREASE OUR CAPITAL EXPENDITURES.
A party who is able to circumvent our security measures could
misappropriate proprietary database information or cause interruptions in our
operations. As a result we may be required to expend significant capital and
other resources to protect against such security breaches or to alleviate
problems caused by such breaches, which could harm our business.
INTERNET RELATED REGULATORY AND LEGAL UNCERTAINTIES COULD HARM OUR BUSINESS.
There are an increasing number of laws and regulations pertaining to
the Internet. In addition, a number of legislative and regulatory proposals are
under consideration by federal, state, local and foreign governments and
agencies. Laws or regulations may be adopted with respect to the Internet
relating to liability for information retrieved from or transmitted over the
Internet, domain name registration, online content regulation, user privacy,
taxation and quality of products and services. Moreover, the applicability to
the Internet of existing laws governing issues including intellectual property
ownership and infringement, copyright, patent, trademark, trade secret,
obscenity, libel, employment and person privacy is uncertain and developing.
Further, the growth and development of the market for online commerce may prompt
calls for more stringent consumer protection laws. New laws or different
applications of existing laws would likely impose additional burdens on
companies conducting business online and may decrease the growth of the Internet
or commercial online services. In turn, this could decrease the demand for our
products and services or increase our cost of operations.
Federal legislation imposing limitations on the ability of states to
tax Internet-based sales was enacted in 1998. The Internet Tax Freedom Act, as
this legislation is known, exempts specific types of sales transactions
conducted over the Internet from multiple or discriminatory state and local
taxation through October 21, 2001. It is possible that this legislation will not
be renewed when it terminates in October 2001. Failure to renew this legislation
could allow state and local governments to impose taxes on Internet-based sales,
and these taxes could decrease the demand for our products and services or
increase our costs of operations.
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<PAGE>
OUR ABILITY TO GENERATE BUSINESS DEPENDS ON CONTINUED GROWTH OF ONLINE COMMERCE.
Our ability to generate business through our web site depends on
continued growth in the use of the Internet and in the acceptance and volume of
commerce transactions on the Internet. We cannot assure you that the number of
Internet users will continue to grow or that commerce over the Internet will
become more widespread or that our sales will grow at a comparable rate. As is
typical in the case of a new and rapidly evolving industry, demand and market
acceptance for recently introduced services are subject to a high level of
uncertainty. The Internet may not prove to be a viable commercial marketplace
for a number of reasons including but not limited to: (i) the lack of acceptable
security technologies; (ii) the lack of access and ease of use; (iii) congestion
of traffic; inconsistent quality of service and the lack of availability of cost
effective, high speed service; (iv) potentially inadequate development of the
necessary infrastructure; (v) governmental regulation; and (vi) uncertainty
regarding intellectual property ownership.
We cannot assure you that the Internet will support increasing use or
will prove to be a viable commercial marketplace.
INFORMATION DISPLAYED ON OUR WEB SITE MAY SUBJECT US TO LITIGATION AND THE
RELATED COSTS.
We may be subject to claims for defamation, libel, copyright or
trademark infringement or based on other theories relating to information
published on our web site. We could also be subject to claims based upon the
content that is accessible from our web site through links to other web sites.
Defending against any such claims could be costly and divert the attention of
management from the operation of our business.
ADDITIONAL RISKS
WE MAY NEED FUTURE CAPITAL.
We intend to increase sales volumes by expanding our business with both
our Internet initiatives as well as our traditional "bricks and mortar" call
center operations. There can be no assurance that our revenues will increase as
a result thereof or even continue at their current levels. As we expend
significant resources to expand our operations, it is possible that we would
incur losses and negative cash flow. In such event it is likely that we would
require additional capital. There is no assurance that such capital will be
available to us or, if available, be on terms acceptable to us.
OUR REVENUES ARE UNPREDICTABLE AND ARE SUBJECT TO FLUCTUATION.
As a result of our limited operating history, we are unable to
accurately forecast our revenues. Our current and future expense levels are
based on our operating plans and estimates of future revenues and are to a large
extent fixed. We may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. Accordingly, any significant
shortfall in revenues would likely have an immediate material adverse effect on
our business, operating results and financial condition. Further, if we should
substantially increase our operating expenses to offer expanded services, to
fund increased sales and marketing or to develop our technology and transaction
processing systems, and such expenses are not subsequently followed by increased
revenues, our operating results may deteriorate.
We will experience seasonality in our business, reflecting seasonal
fluctuations in the travel industry. Seasonality in the travel industry is
likely to cause quarterly fluctuations in our operating results and could have a
material adverse effect on our business, operating results and financial
condition.
OUR SUCCESS IS SUBSTANTIALLY DEPENDENT UPON CERTAIN KEY PERSONNEL.
Our success is substantially dependent upon the continuing services of
Mark D. Mastrini, as well as other key personnel. While we have employed a
number of executives with industry experience, the loss of Mr. Mastrini or other
significant members of management could have a material adverse effect on our
business, financial condition and results of operations.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY IMPACT THE MARKET PRICE OF THE
COMMON STOCK.
We are unable to predict the effect, if any, that future sales of
Common Stock (or the potential for such sales) may have on the market price of
the Common Stock prevailing from time to time. Future sales of substantial
amounts of Common Stock in the public market, including those obtained from the
exercise of the Warrants, could impair our ability to raise capital through an
offering of securities and may adversely affect the market price of the Common
Stock.
THE COMPANY MUST MAINTAIN A CURRENT PROSPECTUS AND REGISTRATION STATEMENT IN
ORDER FOR WARRANTS TO BE EXERCISED BY THEIR HOLDERS.
We must maintain an effective registration statement on file with the
Commission before the holder of any of the Warrants may be redeemed or
exercised. It is possible that we may be unable to cause a registration
statement covering the Common Stock underlying the Warrants to be effective. It
is also possible that the Warrants could be acquired by persons residing in
states where we are unable to qualify the Common Stock underlying the Warrants
for sale. In either event, the Warrants may expire unexercised, which would
result in the holders losing all the value of the Warrants. There can be no
assurance that we will be able to maintain an effective registration statement
covering the issuance of Common Stock upon redemption or exercise of the
Warrants. If we are unable to maintain an effective registration for the
issuance of Common Stock upon redemption of exercise of the Warrants, we may be
subject to claims by the Warrant holders.
OUR COMMON STOCK PRICE AND WARRANT PRICE MAY BE VOLATILE.
The market price for our Common Stock and Warrants are likely to be
highly volatile and are likely to experience wide fluctuations in response to
factors including the following:
o actual or anticipated variations in our quarterly operating results
o announcements of technological innovations or new services by us or our
competitors
o changes in financial estimates by securities analysts
o conditions or trends in the Internet or online commerce industries
o changes in the economic performance or market valuations of other
Internet, online commerce or travel companies
o announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments
o additions or departures of key personnel
o release of lock-up or other transfer restrictions on our outstanding
shares of common stock or sales of additional shares of common stock
o potential litigation
The market prices of the securities of Internet-related and online
commerce companies have been especially volatile. Broad market and industry
factors may adversely affect the market price of our Common Stock and Warrants,
regardless of our actual operating performance. In the past, following periods
of volatility in the market price of their stock, many companies have been the
subject of securities class action litigation. If we were sued in a securities
class action, it could result in substantial costs and a diversion of
management's attention and resources and would adversely affect our stock price.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is the defendant in an action currently pending in the 134th
District Court of Dallas County, Texas entitled FIRST LONDON SECURITIES
CORPORATION V. 800 TRAVEL SYSTEMS, INC. A/K/A/ I FLY, Case No. 00-02222. The
Company was served with this action in April, 2000; the action was brought by
First London Securities, the Company's managing underwriter for its IPO in
January 1998. The plaintiff asserts in this action that the Company failed to
keep current all filings necessary to enable the plaintiff to exercise its
rights under its Underwriting and Representatives' Warrant Agreements at an
optimal market price. Plaintiff currently alleges damages up to approximately
$1.7 million, in addition to court costs and attorney's fees. While it is
impossible to predict the eventual outcome of this action, the Company believes
that it has defenses to these claims and intends to defend this suit vigorously.
ITEM 6. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(a) Exhibit Index:
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C> <C>
3.1 -- Amended and Restated Certificate of Incorporation (1)
3.2 -- Amended and Restated Bylaws (1)
10.1 -- Form of Registrants 1997 Stock Option Plan (1)
10.2 -- Lease dated February 10, 1996 between JFJ Real Estate L.P. and 800 Travel Systems (1)
10.3 -- Airlines Reporting Corporation ("ARC") Agent Reporting Agreement (1)
10.4 -- Letter dated March 6, 1996 from ARC approving change of ownership (1)
10.5 -- Subscriber Service Agreement dated November 27, 1995 between 800 Travel Systems and Payroll
Transfers Interstate, Inc. (1)
10.6 -- Form of Employment Agreement between 800 Travel Systems and Mark D. Mastrini (1)
10.7 -- Form of Employment Agreement between 800 Travel Systems and Biagio Bellizzi (1)
10.8 -- Agreement of March 1, 1997 between 800 Travel Systems and Global Discount Travel Services (1)
10.9 -- 1998 Stock Option Plan (2)
10.10 -- SABRE Subscriber Agreement dated May 1, 1999 between 800 Travel Systems and SABRE, Inc.(3)
10.11 -- Loan and Pledge Agreement dated April 1, 1999 between 800 Travel Systems and Mark D. Mastrini (3)
10.12 -- Deferred Compensation Agreement dated April 20, 1999 between 800 Travel Systems and
Mark D. Mastrini (3)
10.13 -- Phone Agreement dated August 24, 1999 between 800 Travel Systems and AT&T (4)
10.14 -- Employment agreement dated September 16, 1999 between 800 Travel Systems and Robert
B. Morgan (4)
10.15* -- Amendment to SABRE Subscriber Agreement dated November 5, 1999 between 800 Travel Systems and
SABRE, Inc. (5)
10.16* -- Software Development Agreement dated November 5, 1999 between 800 Travel Systems and SABRE, Inc.
(5)
10.17 -- Employment agreement dated November 22, 1999 between 800 Travel Systems and Peter M. Sontag (5)
10.18 -- Employment agreement dated November 5, 1999 between 800 Travel Systems and Michael Gaggi (5)
10.19 -- Amendment to Employment agreement dated November 23, 1999 between 800 Travel Systems and Mark D.
Mastrini (5)
27.1 -- Financial Data Schedule (for SEC use only)
</TABLE>
(1) Incorporated by reference to 800 Travel Systems' Registration Statement on
Form SB-2 No. 333-28237. (2) Incorporated by reference to 800 Travel
Systems' Registration Statement on Form S-8 filed December 15, 1998. (3)
Incorporated by reference to 800 Travel Systems' Report on Form 10-QSB
filed August 14, 1999. (4) Incorporated by reference to 800 Travel Systems'
Report on Form 10-QSB filed November 11, 1999. (5) Incorporated by
reference to 800 Travel Systems' Report on Form 10-KSB filed March 31, 2000
* Portions of this exhibit are the subject of a confidential treatment request.
20
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SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: May 14, 2000
800 TRAVEL SYSTEMS, INC.
------------------------
(Registrant)
By: /S/ Mark D. Mastrini
-----------------------------------------
Mark D. Mastrini, Chief Executive Officer
and Chief Operating Officer
By: /S/ Robert B. Morgan
-----------------------------------------
Robert B. Morgan, Chief Financial Officer
21
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
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0
0
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